By Cate Rocchi Long/short funds are moving to take advantage of uncertain sentiment hanging over ...
By Cate Rocchi
Long/short funds are moving to take advantage of uncertain sentiment hanging over the technology sector which is continuing to cause market volatility in the US.
Spending on that sector's products and services has been cut and even established technology companies such as Oracle are issuing profit warnings. The Nasdaq Composite is down 54% over the past 12 months.
US-based Ahmet Okumus, fund manager of the Okumus Opportunity Fund, said: "We have been meeting with a lot of companies at the CEO, CFO and chief technology officer level and they are clearly expecting a big slowdown in IT spending. This will be a much sharper slowdown than analysts have expected.
"Typically, companies wait until the third month of the quarter before announcing profit warnings but the situation has been so bad that we have seen many companies announce shortfalls in February, the second month of the quarter. We thought there would be an unusual number of shortfalls and there has been."
On 2 March, Oracle's shares fell more than 25% after the database-software maker said third-quarter profits failed to reach forecasts. This was the first time targets had not been made in three years. The share price fell from more than $20 to $15, Okumus said, noting Oracle's fortunes were reflective of the cut in corporations' spending on technology.
Speculators in the market said it was another blow for market sentiment. Okumus said: "Companies have been given a vote of no confidence.
"But at the same time, Nasdaq is down 60% on valuations in the past 12 months and this makes many stocks much more attractive. In the month of February we had 15% invested in the short trades and 15% in long trades. The remainder 70% was kept in cash. Then from 28 February to 2 March 2001, we reinvested the whole portfolio in equities. This is because of the bargains in various sectors. We had the discipline to wait throughout February but as the stocks came back to an attractive price we bought them.
"In the stock market, the slowdown in technology and manufacturing is going to pull down other sectors with it. This is one of the reasons why we are shorting retail and energy names right now.
"But the stock market has come down so far that we are actually looking at going forward on the long side because a lot of stocks appear to be good value," he adds.
Okumus favours technology sub-sectors including semiconductors, software and hardware manufacturers.
As for the outlook for the US economy, Okumus says: "Clearly we are not in the business of making predictions about the economy, but I think there will be further interest rate cuts which will positively impact on the stock prices in the next six months.
"I can see both business and consumer spending picking up in six to nine months time from the levels we have today. We should remember, the US has had the longest expansion Ã lasting 10 years Ã in the post-war era."
On 31 January 2001, he wrote to shareholders of his Opportunity Fund about his intention to sit on the fence for a few weeks: "A lot of bargains we had at the beginning of last month have clearly disappeared but we see solid near-term upside potential right now.
"First of all, a slowdown in spending will affect all companies across the board. Consumers and businesses have been tightening their belts and it is very likely that this will result in an unusual amount of earnings shortfall pre-announcements this quarter, starting in February.
"In the first half of the year, the environment looks bad. Even though the Fed has lowered rates twice, it usually takes six months or so before it starts hitting the spending cycle.
"It is important to note that since we have a clean slate, it is very unlikely we'll get affected by any pullback in the market. Keep in mind, we are not making a market call.
"All we are saying is that these are not stocks that fit our very disciplined criteria right now.
"That is why we are so lightly invested and we are poised to capitalise on what we expect to have an unusually high number of opportunities in the near term."
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